We are very pleased to host a series of three brief reviews of Bert Westbrook's new book, Out of Crisis: Rethinking Our Financial Markets. The first of our reviews comes from Mae Kuykendall, Professor of Law at Michigan State University College of Law:

Our recent economic surprise confounds us. In OUT OF CRISIS: RETHINKING OUR FINANCIAL MARKETS, David A. Westbrook (“Westbrook”) demonstrates that no ready-to-hand view of the economic meltdown works. In his view, the astonishment at these events by our political class reveals a crisis of the post World War II understanding of modern finance. We have before us an opportunity and a need for principled thinking freed of the shattered consensus of an ancient regime in which most of the academy and the political class are paid-up members. The need to comprehend the most promising role for government in rescuing us from crisis and preventing recurrence of that crisis is urgent. Westbrook hopes for something better than the recent past.

Westbrook draws on his wide knowledge of law, finance, literary theory, cultural anthropology, and political history to guide us through our recent disaster and introduce us to the looming hazard of having lost an elite consensus on which policy and day-to-day business is predicated. Westbrook’s framing of analysis could hardly be larger, yet a contrast is useful in recognizing the scope of his effort. The contrast to Westbrook of considerable interest here is CARMEN M. REINHART AND KENNETH S. ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY. I hope I do not break the rules of this forum if I use a second book to set off in relief the ambition and importance of Westbrook’s undertaking. 

In brief, Westbrook offers considerable detail about regulation, financial products of recent vintage, theories of risk and uncertainty, responses to our crisis, the conceptual error in a view of the market and the state as distinct and separate, and other analytic pitfalls and opportunities. He also offers his own unique voice; for those of us who know him, we frequently hear Westbrook’s (Bert’s) mildly zany chuckle punctuating his interpretation of just what “we” have done of late. By contrast, Reinhart and Rogoff offer the standard voice of the dismal branch of social science to convey a “quantitative and historical analysis of crises, “ using financial data, especially about debt, compiled to permit an eight-century comparison. In a mild boast, they tell us, Charlie Kindleberger had narrative, but we have data. Their book is organized around the visual presentation of a massive data base, carried along by a voice of historical interpretive summation and psychological distance. 

Westbrook identifies an intellectual problem in the moment and provides a warning about habit. Professionals in finance and law must not assume a reversion to the mean that the idea of crisis can imply, he says. We would love to proceed by assumption: take two aspirin and assume the usual correction to the business cycle. But Westbrook suggests, we’re not fine. We’re in peril, without a governing paradigm and at risk of letting simple stories substitute for “conceptual renewal.” We must at least conjure enough theory on which to predicate action. For the peril could be more than financial; it could be a watershed for democracies. 

Further, Westbrook argues that the prevailing orthodoxy has left us with a reconstruction project. Confidence in markets went too far and burrowed into our institutional design, giving support to the echo in financial failure of the catch phrase of euphoria in the Reinhart and Rogoff title: “This time is different.” For Westbrook, “This time the failure is different,” and waiting for a reversion to the mean is to be passive in the face of institutional and, Westbrook tells us, political crisis. Parts of the reversion—and tracings of the mean-- are showing up on time. But, the failure was too great. The dislocation hurts human beings. And we have lost our paradigm. 

Rogoff and Reinhart have the unfazed tone of their professional mission: macro-economic analysis and the presentation and management of data. Their primary message to the reader: “We have been here before.” With centuries of data comes insight. So their biggest plea for the future of sound finance is data. Give us data. 

Westbrook combines the recognitions of one versed in post modernist readings of text with a keen sense of our common operational responsibility for immediate action. He gives us prescription at a grand level—a call for conceptual renewal within the “discursive community” of finance and a recognition that finance is now concerned with a web of legal contracts, or words, instead of the tangible things traditionally connected with measuring and preserving value. If we recognize that finance is about politics and law and interconnected contracts, we come face to face with the intellectual problem. Pricing is not so simple as the assumptions of a shopworn model suggest, and data are not much help to repair a fallen model. Having given us theory, Westbrook then pulls us through a look at the “plumbing” of financial markets referred to in passing by Reinhart and Rogoff and proposes tactics for maintaining faith in “ephemeral claims of legal right, over global distances.” The grounding insight is that markets are political constructs, like games. So efficiency is not the only concept to gauge a market’s health. 

In his theory, Westbrook turns to a factor about which the neo-classical economist has no insight to offer and which has a changing import for the tasks financial elites must master: the language in which we execute and regulate economic life. Westbrook directs us to a critical insight for this crisis: we are collectively enmeshed in a tragedy of language, using it to govern financial exchange in ways that are naïvely representational or, in the alternative, unrealistic about the power of a linguistic construct to constrain the world. Disclosure as a strategy, given to us by our savants of the last finance reset, assumes what the English professors tells us is really a childish idea: that language serves as a window to a real picture and, as such, is just a conveyance to us of what is there to be seen and understood. In Westbrook’s phrase, this idea about managing the problems investment presents makes language invisible. 

In our other principal strategy-- risk management-- language is asked to set up containers for large swaths of poorly described arrays of claims on something real. The tragedy is the contradiction. We believe, like children, in being told what our basket of claims contains, and we rely, like language engineers, on the idea that a big enough basket of abstractions—claims on too many things to try to understand with the faith of children looking through a picture window—is conceptually safe. 

The nation—our government, meaning Congress and the administration (Westbrook tells us, the Bush-Obama sequence)-- is there when the gears of tragedy grind to an unhappy resolution. When things go wrong, as children we rail at what we didn’t know, and as language engineers we proceed to try to keep as much as we can hidden away in a basket of risk. Truly, we see through a glass darkly. To be specific, Westbrook tells us that such methods as the auction for the toxic assets of banks and the rescue of General Motors are designed to throw risk back into a basket so we can regain our contradiction. We can still believe disclosure is the way language works, and we can banish the specter of risk to a manageable worry confined in a linguistic cage. With their voice of data-fed experience, Reinhart and Rogoff remark: “…governments have many incentives to obfuscate their books.”

Westbrook warns us about this temptation—embraced with fervor by the established order to keep responsibility for our linguistic folly at bay. As we stare at representations of the world of money, finance, and work, we can believe in the recovery part of “boom and bust.” Simply staying calm—and today we have the leader for cool—should be enough. Prudent central bankers and a dose of Keynes are timeless, and a new government-funded container for risk the new idea. To fix the institutions of finance, elites are using words to rearrange and contain. 

Westbrook’s tactics are, instead, reconstructive and architectural. Design for failure. Have institutions that can fall on their own. And let them fail. Manage the problem of language and its limitations with a diversity of institutional form. Design for a system in which risk is real and scary, and not disclosed or hedged into a predictable, priced dispersion. Remember that markets are constructs, so do design. Match the scaling of architecture to the uncertainty of sustained confidence in price, value, counterparty liquidity. 

Bad outcomes call for rewrite, revision, new content. We hear credit is tight. Yet for those Westbrook calls “finance mandarins,” there’s still enough there to sustain a lot of concept over brute fact. Many of us who would write or read about finance have moved out of a mainly physical world into one apart from the claims of nature and its hardships. Rewrite is fast and easy. Easy enough. 

Macroeconomists have little interest in personality, only in the human folly revealed in a growing data file. Once there were kings, they tell us, who sometimes financed extravagant consumption by “debasing” the metallic coins. But now, for advanced economies, folly is universal and recurring, and the patterns of greater note than the particulars or the types of players in any moment of human folly. 

But Westbrook, taken with our time and place, describes the motives and players in the folly we can claim today. And these—the motives and we the players, our meritocratic culture-- concern him. Our ideology of the market, and our naivete about the reasons that drive how we participate in, regulate, and analyze markets, are an innocent corruption. Few among us have purses lined with the booty from a bribe, but not a few have entered a courtier class, and have found a post in a market of courtiers. There is no higher value among such a class than the status quo of comfort. 

Westbrook ends on a dark note. Such a cosseted class might well plot just our recent roadmap for recovery: keep accountability at bay and make risk opaque. If need be, beggar thy neighbor and arm to the teeth. 

After these musings, in a coda of perhaps three pages, Bert becomes the sunny man many of us know, calling upon his confidence in the “residual sense of republican decency” that should save us all. 

Time will tell.

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